What does achieving diversification in an investment portfolio entail?

Achieving diversification in an investment portfolio involves allocating investments across various asset classes and types. This strategy is designed to manage risk and reduce the volatility of an investment portfolio. By spreading investments among different asset classes—such as stocks, bonds, real estate, and commodities—an investor can mitigate the impact of poor performance in any single asset class.

For example, if equity markets decline, the bonds in the portfolio may help cushion the losses, leading to a more stable overall return. Additionally, diversification allows investors to take advantage of varying market conditions, as different asset classes often respond differently to economic changes and market fluctuations. This balanced approach is fundamental in investment strategy, as it seeks to optimize returns while limiting the potential for significant loss.